Cryptocurrency FBAR Reporting
Cryptocurrency FBAR: When it comes to rules involving IRS reporting of offshore accounts, the reporting a virtual currency such as cryptocurrency, is complicated. That is because the U.S. government has not provided a bright-line test to determine what is considered a foreign account for FBAR Reporting.
While the U.S. Government has provided some insight as to what is reportable, they have not provided a concrete definition that taxpayers can rely upon.
Due to increased compliance enforcement — and the sheer magnitude of offshore penalties — the general recommendation recommend is to report foreign accounts that may be considered “reportable.”
That is because by doing so, you are avoiding a much bigger — and potentially devastating — financial hit if the IRS comes out against you. And, FinCEN’s prior advice was not incomplete and not specific enough to take the firm position that cryptocurrency is not reportable.
Since cryptocurrency and bitcoin are oftentimes used interchangeably, we may refer to both within the article, but we are not referring to bitcoin specifically, but rather cryptocurrency generally.
Here is an introductory summary on reporting crypto currency on the FBAR.
Reporting Cryptocurrency on the FBAR
Generally, foreign and offshore accounts are reportable. This includes a Bank account, savings account, investment account, pension, and life insurance.
As to cryptocurrency, even though it is deemed property (not currency) by the IRS, it may still be reportable depending on how the property is being held.
For example, is it in an account or is it being held on a person wallet?
Foreign Account or Foreign Exchange
If a U.S. person has overseas cryptocurrency on an exchange, then there is a good chance it may be reportable. This is especially true if the cryptocurrency is in a bank account or investment account.
That is because a foreign account is reportable, and just because the property within the account is cryptocurrency would not per se exempt it from reporting.
There are some cryptocurrency accounts that allow the Account Holder to maintain both the Fiat and virtual currency in the same account. Therefore, when a person has cryptocurrency in the equivalent of a Foreign account, the account holder may want to consider reporting it.
If a person maintains cryptocurrency in personal wallet, even if that wallet it is located outside United States, chances are it is not reportable.
Because if the cryptocurrency is not being maintained at a Foreign Financial Institution (FFI), then what are you actual reporting?
In other words, if the cryptocurrency is in your own personal wallet, and presumably you are not a foreign financial institution, then it is most likely not reportable, because how would you even report it?
IRS is Serious about Cryptocurrency
In recent years, there has been increased enforcement of Cryptocurrency.
Some of the recent catalysts for the increased enforcement a Crypto currency compliance, include:
- Coinbase Subpoena
- 6173 & 6174 Letters
J5 is used to enforce cryptocurrency compliance for U.S person.
As provided by the IRS:
“The Joint Chiefs of Global Tax Enforcement (known as the J5) are committed to combatting transnational tax crime through increased enforcement collaboration. We will work together to gather information, share intelligence, conduct operations and build the capacity of tax crime enforcement officials.
The J5 comprises the Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO), the Canada Revenue Agency (CRA), the Fiscale Inlichtingen- en Opsporingsdienst (FIOD), HM Revenue & Customs (HMRC), and Internal Revenue Service Criminal Investigation (IRS-CI).
We are convinced that offshore structures and financial instruments, where used to commit tax crime and money laundering, are detrimental to the economic, fiscal, and social interests of our countries. We will work together to investigate those who enable transnational tax crime and money laundering and those who benefit from it. We will also collaborate internationally to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime and to make the most of data and technology.”
What does J5 Do?
“To actively bring about change, the J5 will:
- Develop shared strategies to gather information and intelligence that will strengthen operational cooperation in matters of mutual interest, and target those who seek to commit transnational tax crime, cybercrime and launder the proceeds of crime
- Drive strategies and procedures to conduct joint investigations and disrupt the activity of those who commit transnational tax crime, cybercrime, and also those who enable and assist money laundering
- Collaborate on effective communications that reinforce that J5 is working together to tackle transnational tax crime, cybercrime and money laundering.”
In 2018, the IRS issued a Summons to Coinbase in order to get details about certain customers.
As provided by Coinbase:
“On February 23rd, 2018, Coinbase notified a group of approximately 13,000 customers concerning a summons from the IRS regarding their Coinbase accounts.
The court ordered Coinbase to provide taxpayer ID, name, birth date, address, and historical transaction records for certain higher-transacting customers during the 2013-2015 period.”
6173 & 6174 Letters
The 6173 and 6174 letters involve IRS enforcement of Cryptocurrency Compliance. As provided by the IRS:
“The IRS started sending the educational letters to taxpayers last week. By the end of August, more than 10,000 taxpayers will receive these letters. The names of these taxpayers were obtained through various ongoing IRS compliance efforts.
For taxpayers receiving an educational letter, there are three variations: Letter 6173, Letter 6174 or Letter 6174-A, all three versions strive to help taxpayers understand their tax and filing obligations and how to correct past errors.
Taxpayers are pointed to appropriate information on IRS.gov, including which forms and schedules to use and where to send them.
Last year the IRS announced a Virtual Currency Compliance campaign to address tax noncompliance related to the use of virtual currency through outreach and examinations of taxpayers. The IRS will remain actively engaged in addressing non-compliance related to virtual currency transactions through a variety of efforts, ranging from taxpayer education to audits to criminal investigations.
Virtual currency is an ongoing focus area for IRS Criminal Investigation.
IRS Notice 2014-21 (PDF) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. Compliance efforts follow these general tax principles. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts and future guidance.
The IRS anticipates issuing additional legal guidance in this area in the near future.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.”
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